Walls had been one of a number of leading fund managers who built up a large cash weighting over the summer months due to fears over expensive valuations and low volatility.
He held close to 20 per cent of his £20m Unicorn Mastertrust fund – which only invests in closed-ended funds – in money markets, helping him to weather the storm during September and early October.
Performance of fund versus sector and index in 2014
Source: FE Analytics
However, Walls is now confident that the equity market will push higher over the coming months and has already put a lot of his cash to work.
“I’ve brought my cash position down to nearer 10 per cent mainly by topping up existing holdings and opportunistically adding to positions on weaker days,” Walls (pictured) said.
“Generally, it seems that the storm clouds have passed for the time being and there is more optimism in the market. I think the ‘Santa rally’ effect will come into play as well, so now isn’t a time to be out of the market.” “I’m sure that headwinds will resurface at some stage when people begin focusing on the UK election, interest rate rises and what’s happening in Europe. However, until then, I think we will continue to climb the wall of the worry.”
Walls says that he is very much on the front foot now having been bearish for some time, and expects to further reduce his cash position over the next few weeks.
One of the major reasons why Walls held so much in the money market is because he defines himself as a contrarian investor, only buying investment trusts trading on a discount to their net asset value (NAV).
This value approach has contributed to his outperformance over the longer term.
According to FE Analytics, his Unicorn Mastertrust fund has been the second best performing portfolio in the IMA Flexible Investment sector since its launch in December 2001, with returns of 208.92 per cent. As a point of comparison, the FTSE All Share has gained 118.44 per cent over that time.
Performance of fund versus sector and index since Dec 2001
Source: FE Analytics
Walls also boasts top quartile returns over three, five, seven and 10 year periods.
The manager has mainly been topping up existing holdings as he says there is still a lack of genuine discount value in the investment trust universe. That’s not say there aren’t exceptions, however; he recently initiated a position in Philip Matthews’ Schroder UK Growth Investment Trust.
The portfolio was previously run by FE Alpha Manager Julie Dean, who had only taken over the trust from Richard Buxton last year. She left the group back in September.
Schroders announced last week that Matthews would take charge of the portfolio, confirming that he will run it in the same way as his £1.5bn Schroder UK Alpha Plus fund, which he took over from Buxton last year.
“The Alpha Plus fund is well-respected and the trust is going to be run along the same lines, although Matthews may have a little more in small and mid-caps due to the structure of closed-ended funds,” Walls said.
“I bought it at around a 9 per cent discount and I think the trust will attract a better following. It is one of those things where you can get decent UK exposure through a well-managed trust, trading on a decent discount and there is scope for the discount to narrow.”
Schroder UK Growth is currently trading on an 8.76 per cent discount to NAV, which is wider than its one and three year average. Its shares have even traded at a premium at points over the past year.
Dean’s recent departure directly led to a widening of the discount, which has contributed to below-par total returns in recent months. FE data shows it has been the worst performing portfolio in the IT UK All Companies sector over one year with losses of 14.39 per cent. The FTSE All Share is up 2.16 per cent over that time.
Performance of trust versus sector and index over 1yr
Source: FE Analytics
Walls expects that to change however, pointing to the board’s commitment to keep the discount narrower than 5 per cent over the long-term. This, he says, is a major reason why he has bought into the trust, though he emphasises his belief in Matthews as a strong stockpicker.
Our data supports this view. Matthews has run funds in the IMA universe since June 2001, including Jupiter’s Growth & Income, Income, UK Alpha and UK Smaller Companies portfolios. He took over the Schroder UK Alpha Plus fund in October last year.
During his career, he has returned 136.06 per cent to his investors while his peer group composite has returned 104.24 per cent. His Schroder UK Alpha Plus fund has slightly underperformed against the FTSE All Share since he took over, however.
Performance of manager versus peer group composite since June 2001
Source: FE Analytics
Schroder UK Growth is predominantly a FTSE 100 portfolio at present, with the likes of GlaxoSmithKline, BP and Pearson currently top-10 holdings. Walls expects there to be a greater emphasis on small and mid-caps in the coming months, however.
The trust has a yield of 2.8 per cent and has grown its dividend by 10 per cent over the last five years, according to the AIC. It isn’t geared and has ongoing charges of 0.47 per cent.
